By DAN REYNOLDS, senior editor of Risk & Insurance®
Back in November, Carsten W. Scheffel, the president and CEO of Allianz Global Corporate & Specialty
Americas, told Risk & Insurance®
during an interview at his offices in Chicago that the company was eager to be taking advantage of a newly competitive reinsurance market in Brazil.
After the passage in January 2007 of legislation that pried open Brazil's reinsurance market to the private sector, Allianz Global Corporate & Specialty (AGCS) had applied for a reinsurance license for a Brazil subsidiary.
Under Brazil's regulations, an approved set of local reinsurers, that include the government controlled IRB Brazil Re, have the right of last refusal on any reinsurance treaty written in that country.
When we spoke to Scheffel, local reinsurers, including IRB, could agree to write up to 60 percent of another reinsurer's contract if they felt the terms were right. As of mid-January, that percentage shifted to 40 percent under that country's regulations.
It's an unusual situation, but given the enormous insurance potential in Brazil's growing economy, the terms of a gradual shift from government monopoly are terms that some global reinsurer's readily accept.
"Right now this is unique," said Stephen Outerbridge, the Bermuda-based chief operating officer and chief underwriting officer for XL Re Latin America, which has committed $100 million in capital to reinsurance in Brazil.
"If you look back to deregulation in Japan, India, Latin America and other markets around the world, the process has been relatively abrupt. In Brazil, however, there has been an effort here to transition the complete opening smoothly over a period of time," Outerbridge said.
With Brazil's upside, local reinsurers aren't fazed by the switch from a 60 percent piece to a 40 percent piece on a last look basis under the government's structure.
"We thought it was attractive even with the 40 percent ruling," said Kurt Muller, the chief executive of Munich Re's Brazilian unit.
But should the other reinsurers pass up the business, a reinsurer can take the whole piece, as Scheffel said he found out in December.
In essence, if a reinsurer is being aggressive and offering large limits or terms they don't want, other local reinsurers can pass, but at least they'd have had a look.
"They are effectively being able to see every single piece of Brazilian business that goes into the international market," said Eduardo Hussey, a Miami-based director for Brazil, Latin America and the Caribbean for Bowring Marsh, a specialist international placement broker.
The minimum capitalization to qualify as a local insurer is some $34 million, or 60 million Brazilian reais.
But there are other less adventurous layers of participation; for example, there is a category of reinsurers that commit at least $1 million in capital but can only participate in 10 percent of a given insurer's reinsurance business.
Scheffel said that Allianz has enough size that, as a local reinsurer, it has ended up taking 100 percent of some recent contracts.
"What we then did is we formulated our own reinsurance treaty, and under the law you have to submit those through the operating reinsurers in that country for them to say, 'Yes, we'd like to participate in your treaty' or, 'No, we would not like to participate in your treaty.' Once they all say no, you are then permitted to assume 100 percent of the risk," Scheffel said.
"It's just that we have large capacity that comes with our treaties. For example, property has $300 million, casualty has $75 million and engineering projects has $200 million. And so for them (other local reinsurers) to sign on would have been just too much for them to take," Scheffel added.
With the 2014 FIFA World Cup on the way and the 2016 Summer Olympics slated for Rio De Janeiro, Brazil is going to be an attractive place for insurers and reinsurance with engineering and construction expertise.
Brazil's rapidly expanding economy is also going to have hundreds of billions of infrastructure work going in the next three to five years, outside of the building that will accompany these sporting events.
"According to their GDP, Brazil is the 10th largest economy in the world and they want to grow, so they have a lot to do with infrastructure," Munich Re's Muller said.
"They have a lot to do with power supply, especially hydroelectric. They have big hydroelectric power stations in the pipelines," Muller said, adding that alternative energy projects including nuclear are also under consideration or underway.
Scheffel said that Allianz has already signed nine Brazilian engineering projects to its Brazilian reinsurance portfolio. Not that Allianz is in an enormous hurry. With other global expansions in the works, Scheffel said, the company is not looking for a quick score in Brazil, no matter how attractive the short or long-term future there might be.
"We don't expect to be a giant in one year. It is a long-term systematic play for us," Scheffel said.
Scheffel said reinsurance business that Allianz also expects to be writing in Brazil will include marine, aviation and financial lines.
"It has tremendous growth," said XL's Outerbridge. "I think you will find that they are projecting the insurance market to grow by 20 percent this year. It is a raw market, and a lot of work has to be done on regulation, on product development--you know, designing policies and products that people want to buy--but it really is a work in progress and significant progress has been made."
THE PEOPLE THING
There is a big upside in Brazil, but as an emerging market it will be more volatile. There is also the talent question.
Scheffel acknowledges the fact that there will be serious competition for talent among insurance companies in Brazil as the market there expands. Imagine, if you can, the size of the universe of underwriters who speak both Portuguese and English? It's relatively small.
"Our No. 1 issue is obviously people," Scheffel said.
"As the Brazilian market continues to emerge and expand, other companies will be going there. There is no secret there," he said.
An executive with one of AGCS's primary insurance rivals sees things in much the same light.
"Brazil has been a closed country in its economy in general and in particular in insurance because of the IRB, so there wasn't much of a need for bilingual underwriters or insurance executives in general," said Herman Weiss, senior vice president of Chubb & Son and a Latin American zone manager for Chubb.
But that has now changed.
"This (being bilingual in English and Portuguese) is today something valuable obviously. International companies are starting to see more opportunities in Brazil, and this becomes one of the needs that the companies have. And there is not a surplus of this," Weiss added.
He said there may already be unfolding a reverse flow of business talent, as Brazilians who in the past had emigrated to the United States and the United Kingdom in search of broader opportunities in the insurance business now may be heading back to their home country as the job market in insurance expands.
"Right now, because of the situation and the economic boom the country is having, a lot of those (challenges) have been removed," he also said. "And on the other side, you have new rules in the insurance industry, which is becoming more open, and all of these capacities that these people have taken or learned over the years abroad are now very valuable," Weiss said.
Scheffel said that Allianz also harbors ambitions to expand in Argentina and Colombia, countries, however, that are nowhere near as hard-charging, economically, as Brazil is.
"Those are two that we are looking at right now, but you have got to remember globally, we have just expanded into Japan and have got into Dubai, Brazil, Mexico and Hong Kong," said Scheffel.
January 1, 2010
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